Booking Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Booking Holdings operates Booking.com, Priceline, KAYAK, Agoda, Rentalcars.com and OpenTable. Figures are in U.S. dollars unless noted.
Financial performance
- Revenue: $2.928 billion, up 25.2% from $2.419 billion reported as 2017 gross profit; on a constant-currency basis, growth was approximately 18%. These headline figures are not fully comparable: under the new revenue standard, 2018 revenue is reported net for Name Your Own Price transactions, while 2017’s comparable figure is gross profit. Management says 2018 revenue would have been about 2% higher under the previous standard.
- Revenue mix: Agency revenue was $2.113 billion (+18.4%); merchant revenue was $526.5 million. Compared with 2017 merchant revenue less cost of revenues, merchant revenue increased 45.6%. Advertising and other revenue was $288.4 million (+50.2%), including about $45 million from Momondo and a roughly $27 million OpenTable loyalty-liability reversal.
- Operating income and margins: Operating income rose 31.2% to $730.2 million. Operating margin was 24.9% of 2018 revenue, versus 23.8% of 2017 gross profit. Performance marketing was $1.106 billion; it declined to 37.8% of revenue from 42.0% of prior-year gross profit. Personnel expense increased 42.1% to $498.9 million.
- Net income and EPS: Net income increased 33.3% to $607.2 million from $455.6 million. Diluted EPS rose to $12.34 from $9.11; diluted weighted-average shares fell to 49.2 million from 50.0 million. Q1 2018 included $54.5 million of unrealized Ctrip equity gains in earnings.
- Cash flow: Operating cash flow was $640.4 million, up from $380.6 million. Capital expenditures were $132.0 million, implying operating cash flow less capital expenditures of approximately $508.4 million. Cash from investing activities was $1.636 billion, principally reflecting net investment sales; financing used $2.205 billion, including $1.487 billion for convertible-note conversion payments and $718.9 million for stock repurchases.
- Liquidity and debt: Cash and cash equivalents were $2.622 billion; short- and long-term marketable investments totaled $13.673 billion. Management reported $16.3 billion in cash, cash equivalents and marketable investments. Outstanding debt principal was approximately $9.1 billion; carrying value included $941.7 million of current convertible debt and $7.990 billion of long-term debt. The $2.0 billion revolving facility had no borrowings outstanding.
- Balance sheet: Total assets were $25.019 billion and total liabilities $14.331 billion at March 31, 2018. Current liabilities included $1.426 billion of deferred merchant bookings.
Material changes and unusual items
- Adopted ASC 606 on January 1, 2018 using the modified retrospective method. Travel-reservation revenue is recognized when travel begins rather than when it ends; this changes quarterly timing. Adoption increased opening retained earnings by $188.5 million, net of tax. For Q1, the company estimates reported revenue was about 2% lower than it would have been under the prior standard.
- Adopted new financial-instrument accounting: subsequent changes in Ctrip equity-security fair value are recognized in net income. The company recorded a $241.1 million after-tax opening transfer from accumulated other comprehensive income to retained earnings and a $54.5 million Q1 unrealized gain in earnings.
- Paid $714.3 million to repay the principal and $773.2 million for the conversion value of the 2018 convertible notes at maturity. The 2020 convertible notes became holder-convertible at quarter-end and were classified as current.
- Repurchased 373,119 shares for an aggregate $731.6 million. A new $8.0 billion authorization was approved; $9.8 billion remained available under repurchase authorizations at quarter-end.
- Q1 operating cash flow included approximately $726 million of Netherlands income-tax prepayments made to obtain discounts. The quarter also included a roughly $27 million reduction in OpenTable’s loyalty liability following the introduction of a three-year expiration for diner points.
- Revenue presentation and expense reclassifications changed reported line items, but management states the presentation changes had no impact on operating or net income.
Outlook, management commentary and risks
- Management estimated a 2018 effective tax rate of approximately 18%–21%, subject to uncertainty as the company completes its accounting for the U.S. Tax Act. The $1.3 billion transition-tax liability is payable over eight years.
- Management expects accommodation growth rates generally to decelerate as the business scales. Gross bookings grew 20.9% reported and approximately 12% in constant currency; accommodation room nights increased 13.2%. Currency movements materially benefited reported growth.
- Management expects revenue-recognition timing to make Q2 2018 revenue less than 1% lower, Q3 approximately flat, and Q4 approximately 4% higher than under recognition at check-out. Q1 is typically the company’s lowest-profitability quarter; seasonality and holiday timing can affect quarterly comparisons.
- Marketing investment is expected to continue; management said brand marketing expenses may increase significantly in 2018. It also cited long-term pressure on performance-marketing returns, intense competition, and potential margin pressure from expanding merchant and alternative-accommodation offerings.
- Legal and regulatory exposure: Booking.com’s Turkish court-ordered suspension of offers to Turkish residents is expected to continue to weigh on results. French authorities seek approximately €356 million for alleged historical income-tax and VAT liabilities, and have begun a further audit; the company contests the assessments. Price-parity investigations, laws and litigation could require changes to business practices or lead to fines.
- Other risks: Foreign-exchange volatility, travel-demand shocks, competition from search and meta-search platforms, cybersecurity and privacy obligations (including GDPR effective May 2018), tax-law changes and the Dutch Innovation Box benefit. The filing says the company could not predict the outcome of key legal matters. The company also disclosed its acquisition of FareHarbor in April 2018.
Most important facts for investors to verify
- Compare growth using consistent revenue-standard and constant-currency measures; reported 2018 revenue is compared with 2017 gross profit, not like-for-like revenue.
- Track accommodation room-night and gross-bookings growth, merchant mix, cancellations, marketing efficiency and margins as the business scales.
- Assess cash generation after tax prepayments and capital spending, and the effects of debt conversion, repurchases and the remaining repurchase authorization.
- Monitor the French tax assessments, Turkish restrictions, price-parity proceedings and the final accounting and cash effects of U.S. tax reform.
- Evaluate exposure to Ctrip investment-value changes, foreign exchange, tax incentives and the integration and performance of recent acquisitions.